Reconciling corporation book and tax net income, tax years 1996-1998 - Statistical Data Included

Statistics of Income Bulletin, Spring, 2002 by George A. Plesko

The second panel of Figure G repeats the tabulation of the first, but is limited to companies in the largest size category, those with assets of $250 million or more. For the 3 years, the overall percentage of returns showing different signs is only slightly higher, at 10.9 percent for 1996, 11.1 percent for 1997, and 11.5 percent for 1998. Strikingly different, however, is that for each of these years, the majority of returns reporting different "signs" of income are those with positive pre-tax book income and zero or negative net income.

For the largest corporations, the percentage reporting different signs of income is somewhat smaller than for the population as a whole: 16.2 percent for 1996, about 16.0 percent for 1997, and 15.1 percent for 1998. What is different in this panel, however, is that of those returns with different "signs" of income, the relative number reporting positive pre-tax book income but zero income subject to tax is more than four times the number reporting positive income subject to tax but zero or negative pre-tax book income for 1996 and 1997, and more than 3 times for 1998.

In Figure H, the tabulations of Figure G are repeated, but with the amount of book-tax difference for each combination of income reported rather than the number of returns. For active corporations, based on the sign of pre-tax book income and net income (loss) for all corporations in the sample, more than 100 percent of the total book-tax income difference for 1996 and 1997 is due to corporations with positive amounts of both, with the other three combinations largely offsetting each other. For companies reporting positive pre-tax book income but zero net income or loss, the amount of the book-tax difference will always be positive, just as corporations reporting positive net income and negative pre-tax book income will always show a negative book-tax income difference. For companies with negative or zero amounts of both pre-tax book and net loss, the aggregate value of the book-tax difference is negative, suggesting these companies, on average, report higher net income (loss) than book income.

For 1998, the amount of book-tax difference due to companies with positive pre-tax book income and positive net income was 94.3 percent of the total, with the amount of book-tax differences reported by companies with positive pre-tax book income and zero net income or loss increasing 87.4 percent, from $65.4 billion for 1997 to $122.5 billion for 1998, an increase of $57.1 billion.

The next two lines of data provide information on the magnitude of the difference between pre-tax book income and income subject to tax. Between 1997 and 1998, the amount of book-tax income differences reported by companies with positive pre-tax book income and zero income subject to tax increased significantly, from $76.4 billion to $132.6 billion, a 73.6-percent difference.

The bottom half of Figure H provides the magnitudes of book-tax differences for the largest corporations. Examining the dollar amounts of the book-tax difference for corporations with assets of $250 million or more shows a similar pattern for 1996 and 1997 as in the entire sample. Most notable, however, is that the sharp increase in the book-tax difference for 1998 seems to have been driven by the increase in the book-tax difference of these large corporations. For 1996 and 1997, the book-tax differences of corporations reporting positive pre-tax book income and positive net income were approximately equal to the entire amount of the book-tax difference for all returns included in the statistics.